Tuesday, February 23, 2010

Slime Molds, Economic Efficiency & Market Failure in Haiti

Let's Start with Steven Landsburg's bogus claim that in biology there is no equivalent of an invisible hand. In Chapter 8 of his book, The Armchair Economist, Landsburg says the following: "In biology, there is no equivalent of the Invisible Hand. Survival of the fittest is a different thing altogether. Nothing in the evolutionary theory either promises or delivers the spectacular efficiency of the competitive marketplace."

Landsburg goes on do describe in detail the inefficient biological consequences of sexual selection as exemplified by the male bird of paradise and his ridiculously long tail. Sadly, there's nothing natural about sexual selection. (I'm slightly exaggerating; unless you are in to some really kinky stuff sex is both beautiful and natural. It's the selection part that can seem unnatural at times.) Sexual selection is a slightly different beast than natural selection. I'm not going to attempt to clarify or defend my previous statement other than refer the skeptical to Richard Dawkins' The Selfish Gene.

Sexual selection, however is only one facet of evolution as a whole, and while it can be notoriously inefficient, natural selection is mercilessly efficient. If an organism wastes even a small amount of energy pursuing strategies that aren't optimized toward efficient survival and reproduction, it wont either. (Survive or reproduce.) As a matter of fact, economists and other scientists can use the fruits of natural selection to optimize human organizations toward greater efficiency. Consider the area of planning public transportation networks. At the very least, slime molds are as 'smart' as we are.

As reported in Wired Magazine:

"Talented and dedicated engineers spent countless hours designing Japan’s rail system to be one of the world’s most efficient. Could have just asked a slime mold.

When presented with oat flakes arranged in the pattern of Japanese cities around Tokyo, brainless, single-celled slime molds construct networks of nutrient-channeling tubes that are strikingly similar to the layout of the Japanese rail system, researchers from Japan and England report Jan. 22 in Science. A new model based on the simple rules of the slime mold’s behavior may lead to the design of more efficient, adaptable networks, the team contends."

Read More http://www.wired.com/wiredscience/2010/01/slime-mold-grows-network-just-like-tokyo-rail-system/#ixzz0gOCULWSp

The primordial ancestors of this particular slime mold that weren't efficiently searching for food didn't make the cut. Due to the bias toward 'economic' efficiency imposed by natural selection, slime molds have a lot to teach us. (One quick aside: there is a growing number of evolutionary biologists who theorize that the evolutionary development of the large 'inefficient' human brain is a result of sexual selection. That, however, is a story for another time.)

Now on to market failure in Haiti. In Landsburg's chapter on why prices are good, he says: "Even when we consider a complete economy, with many goods and many activities, all of which interact with one another in complicated ways, the existence of competitive markets and market prices is exactly what is required to guarantee efficient outcomes."

Enter Haiti. The recent disaster in Haiti has highlighted one of the failures of the market economy when it comes to allocating scarce resources via the price system. I've read that the price system functions because it gets scarce resources to where they are valued most. We can tell who values these resources by who is willing to pay the most for them. I'm not going to explain any further on how this works or why it works, but I will mention a case where it doesn't.

The price system only funnels goods to those that value them most when those that value them most have the money to pay for them. I'm pretty sure a starving earthquake victim values a granola bar more than an overweight American journalist would, but according to the market, the journalist wins. (It's entirely possible that misrepresenting the price system, and our resident White Knight will ride to the rescue of this economic damsel in distress by posting in the comments of this thread. Hopefully this little parenthetical attack will preempt him from doing so.) Anyway, on to a better description of the problem, and it's non-market solution, given by Noam Scheiber, a senior editor at The New Republic:

Interviewed by Bob Garfield, from NPR's On the Media

NOAM SCHEIBER: A few days after the earthquake you had hundreds of journalists there, and it was just hard to believe that they weren't taxing an already fairly weak infrastructure there. There were constant streams of stories about teams of nurses and rescue workers who were marooned at airports and military bases because of the clogging and congestion at the Port-au Prince-airport.

Once they got into the country, obviously the journalists had to have places to stay, food to eat, flashlights, batteries. Even if they did not think of themselves as directly taking food out of the mouths of Haitians, clearly they were bidding up the prices of these things and making it more difficult for people on the ground there to get access to them. In fairness, some news organizations actually shipped in their own supplies, but then the question arises, well why not ship in supplies for relief, rather than to serve journalists who are on the ground.

BOB GARFIELD: All right, so a major news story, unspeakable tragedy. News organizations have to report on it for their readers, listeners and viewers. What’s the solution?

NOAM SCHEIBER: Well, my thought is a solution that we journalists use in other contexts, which is the idea of a pool. And I think it’s most commonly used in coverage of the White House. There are dozens of news organizations and probably hundreds of journalists who are responsible for reporting on the daily comings and goings of the President. Obviously, those hundreds of journalists can't be in earshot and have a straight line view of the President at every moment. So the arrangement that we as a press corps have arrived at is the pool. And the person who is the pool representative at that particular moment writes up a dispatch, a very literal take on what the President has done. It gets distributed through the White House press operation to the rest of the White House press corps.

It’s very easy to imagine something similar working in Haiti or in disaster zones generally, so that you would have only a fraction of the reporters on the ground at any moment.

BOB GARFIELD: Apart from their missions to serve their own audiences, news organizations are also businesses and in many cases in competition with one another. I don't know if any executive producer of any news show saw your piece and rolled his eyes and made a vulgar gesture, but I can certainly imagine him doing that – like, yeah, nice piece, Noam. What reality are you living in?

NOAM SCHEIBER: Frankly, I think that competition generally serves us well. I mean, we want dozens of news organizations reporting on the presidential administration because it’s the most important institution in the world, so the average citizen and the social good is very well served, even if there’s a bit of redundancy.

But I think this is a unique circumstance, and there are other unique circumstances in which we set aside the brutal logic of competition and agree to some syndicate that a bunch of news organizations pitch in for a kind of common product.

Just because you’re working from common raw data does not mean that all of your stories have to be identical and then you can't subsequently compete the same way that news organizations do for elections by using the same exit polls.

(Listen to the interview, or hear the rest of the story at http://www.onthemedia.org/transcripts/2010/01/22/02)

Markets are efficient, except when they aren't, and the price system is awesome, except when it's not.

(What's that I hear, the galloping hoof beats of a noble steed? Onward to the comments!)

Foreign journalists enter the country in droves and purchase goods and services from Haitian businesses and that's bad because the spike in demand drives prices up.

Alright, but we seem to be ignoring the fact that the Haitians who receive the influx of foreign currency in turn spend that money on things like food, water, and rebuilding their trashed economy. Nominal prices have certainly increased for certain goods, but price levels tend to do that after any disaster, regardless of how many journalists happen to be covering it. Are journalists a major source of the increase in the domestic price level? What's the effect of their presence on real prices? Are Haitians actually poorer as a result of the influx? What effect does the influx of foreign currency have on the exchange rate and Haiti's production sector?

The list of questions goes on and I certainly don't have all the answers. But at least I know that until I DO have the answers I can't instantly condemn the foreign reporters, or declare that the market has failed and the price system doesn't work. For better or worse the price system seems to be doing exactly what economic theory predicts, so how it's failed I'm not sure.